The BOJ has been strangely silent about whether or not negative interest rates are actually working

The Bank of Japan has been noticeably unclear when addressing the effectiveness of its negative interest rate policy (NIRP), a Deutsche Bank report noted. Strangely quiet.

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"What now?" is the question being asked of the BoJ

In January when BoJ Governor Haruhiko Kuroda announced the central bank's negative interest rate policy, he clearly set a benchmark and target. Starting in six months but certainly by years end the impact of negative interest rates to reach the "real economy" would be known.

"In other words, by September, it will no longer be able to give the excuse that it is still waiting for the impact of NIRP," Deutsche Bank Economist Kentaro Koyama wrote in an August 4 piece. "The bank might believe that it needs to face the effects fully."

The Deutsche Bank Japan Monetary Policy Watch report, titled "Possible scenarios for September MPM," was pointed. Deutsche Bank has been sharply critical of central bank negative interest rate policy in the past, and Koyama's piece takes holding the central bank accountable to the next level.

"What now?" the report asks. "The BoJ has not provided a clear answer to this question."

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What is the status of monetary / fiscal policy integration at the BoJ?

That "what now" question comes at an interesting historical point in time. As previously reported in ValueWalk, the BoJ is currently considering a unique experiment that would combine monetary and fiscal stimulus. Referred to in some corners as "helicopter money," the strategy, like all quantitative stimulus programs, has its risks and potential rewards.

By spending directly into the economy - rebuilding roads, bridges and other core infrastructure — all without necessarily increasing government debt levels, the plan is an interesting first in combining monetary and fiscal approaches to boost the "real economy." On the downside, doing so could set a negative precedent and impair central bank independence and diminish currency legitimacy.

While Koyama's report didn't discuss the integration of monetary and fiscal policy in detail, other than to mention it as one of several probability paths on the central bank's quest to see a 2% price stability target.

"One possible, if unlikely, conclusion from the assessment (of the unmet 2% target) would be that an early realization of the 2% target is not feasible due to the hindrance in the transmission mechanism of monetary policy," the report noted. "In such a case, the bank would have to talk with the government and either amend the joint statement or call for a bolder fiscal policy. That leaves a wide range of conceivable scenarios other than easing in the current three dimensional policy or simply reaffirming present policy."

Getting ready for quantitative and qualitative easing?

At present, the BoJ appears to be assessing and determining its next steps. If negative interest rates are not achieving their goal of a 2% target, what is the point? Are the risks - which have yet to be outlined in public in clear detail - being obfuscated much like the results of BoJ's NIRP policy?

"The bank might find that NIRP is working as expected but that quantitative easing is having diminishing marginal return or approaching its limits," the Deutsche Bank report noted, echoing numerous hedge fund managers and financial professionals who have pointed to the emperor with no cloths.

"In such case, we believe it could carry out aggressive easing action under NIRP and adopt a more flexible pace in its monetary base expansion." Koyama did not specifically define "flexible pace" but he suspects "that it would acknowledge at the same time that the effect on the real economy would remain limited even with a more flexible pace of monetary base expansion."

But the experiment to combine fiscal and monetary policy might wait. "Conversely, the scenario includes the option of withdrawing entirely from NIRP, which has considerable side effects, and reinforcing the Quantitative and Qualitative Easing (QQE) scheme."